U.S. data cushions Canadian dollar fall as Europe's woes weigh

Claire Sibonney

5 Min Read

TORONTO (Reuters) - The Canadian dollar slipped to a one-week low against the U.S. dollar on Thursday but outperformed most major currencies as investors contrasted a positive outlook for the United States - Canada’s biggest trading partner - with an escalating financial crisis in Europe.

The euro plummeted to its lowest level against the U.S. dollar since September 2010 and hit an 11-year trough versus the yen as fears about sovereign funding and concerns about the euro zone’s banks made investors shun the shared currency.

Meanwhile, a report showing U.S. private employers added 325,000 jobs in December, more than double economists’ expectations, added to the greenback’s strength, and in turn helped Canada on the G10 crosses, with the exception of the U.S. dollar and the yen.

“I think we have two things, one is that ADP (jobs report) was a very pleasant surprise for most and has built up the whisper number for non-farm (payrolls), and the second side is that risk for euro just continues to escalate and so we have both forces really working in tandem here,” said Camilla Sutton, chief currency strategist at Scotia Capital.

Elevated oil prices have also been closely correlated with Canada’s resource-weighted currency recently. Oil prices settled lower on Thursday but geopolitical tensions between Iran and the West kept a floor under losses and U.S. crude still ended near $102 a barrel.

“As odd as it sounds, I think there is some recognition that oil prices remaining above $100 because of Iran is also good for Canada,” added Sutton.

“Just because it also increases risk, and the downside of that could be very negative overall, but I think in the immediate term it’s just seen as keeping oil prices elevated and that in turn is good for the Canadian economy.”

The Canadian dollar ended the North American session at C$1.0191 against the U.S. dollar, or 98.13 U.S. cents, down from Wednesday’s finish at C$1.0123 versus the U.S. dollar, or 98.78 U.S. cents.

Concerns that European banks will struggle to raise fresh capital to repair their battered balance sheets rose after Italy’s largest bank, UniCredit (CRDI.MI), had to heavily discount a rights issue to sell the shares on Wednesday.

Meanwhile, latest data from the European Central Bank suggested the region’s banks were hoarding cash rather than lending to each other, despite the ECB providing almost half a trillion euros of ultra-cheap three-year loans last month.

The first French bond auction of 2012 helped dispel some fears about the ability of governments to fund their massive debts, but the key test of investor sentiment comes next week when Spain and Italy, the two countries most exposed to an escalation of the crisis, kick off their funding campaigns.

Markets are also awaiting talks between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Berlin on January 9, as well as key Canadian and U.S. employment reports on Friday.

“I expect there could be some reaction from them, but in the coming weeks I think European focus will still be the key theme,” said Greg Moore, FX strategist at TD Securities.

“The movement in dollar/CAD has been pretty much following the broader risk sentiment, which after the slow holiday period has sort of picked up focus on the European woes ... it’s basically sovereign and bank funding stresses as a whole.”

Analysts put near term Canadian-dollar support between the 50- and 40-day moving averages of C$1.0227-C$1.0255. Resistance for the Canadian dollar against its U.S. counterpart was seen at C$1.0150.

The Canadian dollar is expected to soften against the U.S. currency over the next several months as investor sentiment is squeezed by further euro zone debt problems, before reacquainting itself with parity a year from now, a Reuters poll showed.

Canadian bond prices were little changed across the curve on Thursday, outperforming weaker U.S. Treasuries, as Canada’s fiscal situation still looked better than its U.S. counterpart.

The two-year bond was off half a Canadian cent to yield 0.973 percent, while the 10-year bond added 15 Canadian cents to yield 1.978 percent.